Corporate Healthcare: Important Contracts

Michael W. Davis, DDS


There exist 3 common contracts doctors sign with corporate dentistry. These include employment contracts, purchase sales agreements, and business service agreements (BSAs). Each of these contracts may be peppered with legal landmines. It is imperative that doctors accept that their expertise is patient care, and not swimming with the sharks of corporate healthcare. Nothing in corporate business negotiation can be taken at face value. This is not a relationship based on mutual trust and respect, as in the doctor-patient relationship, or when working with a specialist colleague. Corporate interest is almost exclusively directed at the financial welfare of investors. By contrast, a doctor’s focus should be his or her patients’ best welfare. The conflict of interest is self-evident.

It is advisable for dentists to secure the services of highly capable legal counsel before entering into such agreements. The attorney should have a solid background in corporate healthcare employment and contract law, especially in the dental service organization (DSO) industry. These are not well-intended local attorneys who may also spread their time between divorce law and personal injury cases. The DSO industry retains the best legal counsel that money can buy. You need to be on a somewhat equal footing.

Legal counsel advice is invaluable with employment contracts. Attorneys may tell you from the onset their personal knowledge of the reputation of a corporate employer, saving you headaches later. Some employers are quite hostile toward employee doctors, as contracts may be routinely dishonored, and workplace abuses abound. In this case, you need to immediately walk away.

A potential contract misrepresentation may be assigning an employee the bogus designation of independent contractor. The IRS has very specific guidelines to distinguish employees from independent contractors. Dental employers are well aware of their tax advantages, and potential tax liabilities, if a doctor’s employment status is misrepresented. This misrepresentation also gives employers unlawful advantages regarding state labor laws. A DSO that is this dishonest is never to be trusted again; walk away!

Employee/doctor compensation represents a huge area for examination. Too many contracts leave this area intentionally ambiguous. Contract wording may state that the doctor receives 25% of the fees from dental services. Is this production or collections? Make no mistake; some dishonest employers keep 2 sets of financial books. Does this include the doctor’s exam fee? What if the employer has signed onto a low-end dental health maintenance organization that generates ongoing monthly fees for the owners, but not the doctor? Why be obligated to provide dental services for a paltry sum?

Further complicating doctor compensation is the phrase “minus adjustments.” Exactly how and why will the dentist’s income be adjusted downward? This must be spelled out in detail. Will the dentist be penalized for flawed dental laboratory work? Are the adjustments for some “Gold Plan” masquerading as insurance, in which the DSO receives a monthly payment for discounted services, for which the employee doctor eats losses for discounted care?

Noncompete clauses all too often represent a mechanism to retain employees, no matter their dissatisfaction with the company and the desire to leave. In states such as California, these clauses are fully unenforceable. In other states, these agreements are fully enforceable. A designated time frame and distance from the practice site location are stipulated in the contract, if and once employment discontinues. It is not unusual for unethical employers to enforce a noncompete clause for multiple clinics that they run in a given state. This activity is highly onerous and represents a restriction of free trade under most state statutes.

Nondisclosure clauses may be artificially couched by employers as a means to protect proprietary business secrets and patient confidentiality. In dentistry, there exist very few legitimate proprietary business secrets. The ADA Principles and Code states in section 3.C., Research and Development, that “Dentists have the obligation of making the results and benefits of their investigative efforts available to all when they are useful in safeguarding or promoting the health of the public.” Further, federal HIPAA confidentiality statutes safeguard patient records from unlawful disclosure. Here’s the reality: many DSOs want to discourage potential whistleblowers and company exposure to civil or criminal violations.

Arbitration clauses will mandate the means and venue for employer-employee dispute resolution. This is often the single most important element in an employment agreement. As an employee, you are at a distinct disadvantage if dispute resolution is mandated in another state’s jurisdiction in which the DSO is headquartered. You are at a distinct disadvantage if mandatory mediation is required. A clear and blatant violation to state employment and labor laws may be disregarded by a mediator, whose loyalty is to those who regularly retain his or her services (the employer).

When selling one’s dental practice to a corporate entity, that practice’s ownership and management becomes controlled by the (beneficial) buyer. Most DSOs establish shell companies for the purpose of nominee practice ownership. These nominee owners (sometimes called “sham-owners” in court filings) may be a single dentist or a group of dentists (as in a professional corporation [PC]). The bottom line is that the selling doctor is no longer the party in control, even if that individual elected to stay on as an employee.

Traditionally, a DSO would pay a selling doctor as little cash as possible, and mostly remunerate the doctor in junk-grade securities. Corporate directors determine when, by whom, and to whom, these securities may be sold. These junk-grade stocks and bonds are not generally traded on open market exchanges like NASDAQ or the New York Stock Exchange. They have minimal to no regulation by the US Security and Exchange Commission. They are highly vulnerable to manipulations in value. That may have been acceptable for selling dentists during earlier times of rapidly spiking price valuations for the DSO industry.

Today, most selling dentists have gotten smarter; they want cash, and usually up front. However, many DSOs want to hedge their bet, retain the selling doctor as an employee for a designated time (often 18 to 24 months), then make a backend payment on the practice purchase. This kind of arrangement has been known to go very badly. The corporate employer can make working conditions highly untenable for the selling dentist. Auxiliary staff and patients may be abused, disregarding the long-term positive relationships established by the doctor. Cost cutting via offshore labs, inadequate supplies, discounted low-end dental materials, and understaffing may all frustrate a selling doctor retained as employee. The corporation’s goal is too often immediate profits, regardless of patient welfare, and to renege on the doctor’s backend payment. The doctor will either be forced to resign under duress, or will be fired. Either way, the DSO saves money on the backend payment.

Fortunately for selling dentists, many have witnessed the mistreatment inflicted on colleagues. They are well aware of disturbing patterns within the DSO industry and this has forced the DSOs to focus on the setup of de novo clinics (clinics built from scratch). Maybe this indicates that they feel it is easier to deceive a young recent graduate dentist than an older and more seasoned practitioner?

BSAs will not be encountered by the average dentist. BSAs are designed to mask and protect true beneficial owners of corporate dental practices. These are agreements between a shell company practice “owner(s)” established and controlled by the DSO, and the DSO. Among other issues, the misrepresentation’s intent is to circumvent state laws on ownership of a practice.

A BSA will clearly orchestrate full control of clinic bank accounts by the DSO. The illusionary ability of nominee owners to sell their asset of a dental practice(s) will be controlled by the DSO. Clinic profits are generally reassigned for accounting, as overhead operational expenses of the DSO. These monies are pulled out of the states and communities where profits were generated and deposited into Delaware accounts. From there, funds often flow into offshore accounts under foreign licensed corporations. The ultimate beneficial clinic owners are very often private equity investment firms, not doctors. They generally position themselves not as owners, but as first lien creditors or mezzanine financiers. This lowers potential federal tax exposure from approximately 38% earned income tax to 25% capital gains tax. The above tax dodge also circumvents most or all state tax liabilities.

A variety of nominee owner mechanisms have been established by different DSOs. All are designed to protect corporate entities and their directors from their unlicensed and unlawful practice of dentistry. A former favorite was to enlist individual dentists to front as clinic owners. Many of these doctors have faced regulatory disciplinary actions against their licenses. In a specific situation, the state of North Carolina brought legal action against a DSO. The state initially filed against nominee “owner” dentists and the DSO. By settlement time, all the doctors had become parties with the state as plaintiffs against the DSO. In the end, each doctor received true beneficial ownership of practices, which the DSO previously controlled for a private equity firm. Thus, a DSO enlisting individual doctors as nominee owners has become less popular.

A favorite DSO “end around” to mask true clinic ownership is only allowing the doctor ownership of up to 49% of any given clinic. As a minority shareholder, the doctor truly controls nothing. Bonuses, production quotas, staffing, operation hours, and more are still controlled by the DSO.

Another modern tactic is to place nominee ownership in the hands of a large group of dentists. This may be organized as a PC. Few, if any, of these doctors really manage the clinics that they purportedly own. This shell entity is established to rubber-stamp all decisions of the DSO. At the same time, the DSO and its officers are protected from possible regulatory liabilities as well as potential patient malpractice or fraud legal actions.

Dentistry is no longer the cottage industry that is was 20 to 30 years ago. Corporate healthcare is an increasing player on the landscape. Doctors, formerly accustomed to dealing with other doctors as respected colleagues on a handshake basis, are transitioning to a new reality. Third parties have entered into the doctor-patient relationship, without the knowledge or consent of patients. Patient interests are often a secondary consideration.

State dental boards are often ill-equipped to deal with this new reality and lack the legal resources to regulate DSOs. An individual doctor entering into a relationship with corporate dentistry had better be prepared for reality shock. Without proper representation of legal counsel, doctors are too often led like lambs to slaughter.

Dr. Davis is a 1981 graduate of The Ohio State University College of Dentistry. He has been a private practitioner since 1983 and recently relocated to Albuquerque, NM, from Brunswick, Me. He has authored numerous articles and lectured on clinical dentistry and wellness issues. He can be reached at (505) 294-0959.

Disclosure: Dr. Davis reports no disclosures.

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